Last week the Supreme Court of the United States (“SCOTUS’) released its opinion in, South Dakota v. Wayfair Inc., which addresses a state’s authority to require internet retailers to collect sales tax. The Court ruled that the proliferation of internet retailers has changed the nature of commerce. And, that this change has resulted in the Court’s own precedent, which required a retailer to have a physical presence in a state before it could be subject to sale tax collection requirements, to now be obsolete.
Prior to this ruling states could require internet retailers to collect sales tax only if that retailer has a physical presence within the state. The “physical presence” requirement severely limited the ability of states to require sales tax collection by internet retailers. The increase in purchases from online retailers who were not required to collect sales tax resulted in a decrease in sales tax revenue. Legally, in New Jersey, whenever one purchases goods from online or outside of the state and doesn’t pay or underpays sales tax they are required to pay to the State a use tax based on the costs of those goods. However, collection and enforcement of the use tax is very difficult, as many individuals are simply unaware of their obligation to self-report or may even intentionally forego payment. A 2011 report by the Rutgers Edward J. Bloustein School of Planning and Public Policy, estimates that, in New Jersey, anywhere between $52 million to $171 million were foregone in 2009 due to internet purchases of goods and services from out-of-state internet vendors.
While New Jersey municipalities will not see a direct impact to their budgets, the Court’s ruling could lead to an increase in sales tax revenue going into state coffers. This projected increase in revenue has already become a talking point as state lawmakers in Trenton work to pass a budget. Aside from the more general benefits of increased state revenues, an increase in sales and use tax revenue would benefit New Jersey property taxpayers. Not only by providing a fair playing field for commerce but because a percentage of the revenues from sales tax are constitutionally required to be appropriated to the Property Tax Relief Fund. No word yet on state legislative initiatives attempting to recapture once lost sales tax revenues, in response to the Court’s decision.
The League would like to thank our national affiliate, the National League of Cities who among others, joined as amicus in this important case and advocated on behalf of municipal governments in New Jersey and nationwide.
Contact: Frank Marshall, Esq., League Staff Attorney, FMarshall@njslom.org, or 609-695-3481 x137.